Hospital and Health System Executive Compensation in 2013: 8 Trends to Monitor

For hospital and health system executives, salaries and total compensation continue to meet the critical eye of the public, employees and other community stakeholders, and this issue will not dissipate in the near term.

In November, Santa Clara County, Calif., voters approved a ballot measure that will cap the compensation of executives at non-profit El Camino Hospital in Mountain View, Calif., to no more than twice the salary of California's governor (or no more than $330,000). However, the hospital plans to fight the measure in the courts and is asking attorneys to see if it is, in fact, legal.

In July, New Hampshire shined the magnifying glass on non-profit hospital CEO pay. The independent New Hampshire Center for Public Policy found that average compensation of state non-profit hospital CEOs grew by roughly 18 percent between 2006 and 2009, which was much higher than the growth of private sector wages.

For-profit hospital companies also made news after public records showed CEOs at the largest operators made anywhere between $3.7 million and $21.6 million in total compensation in 2011.

Hospitals and health systems have a lot on their plates, from healthcare reform initiatives to ensuring their balance sheets will be black in the next quarter. Adjusting executive compensation packages has made its way into those discussions as well, and innovative organizations are continually assessing whether and how to incorporate the latest practices.

As hospitals and health systems look to stay at the forefront of innovative and reasonable compensation packages for their executives, here are eight trends regarding healthcare executive compensation based on expert analysis within the field.

1. Executive compensation arrangements will be simpler. Several years ago, it was common for hospital and health system executives to have elaborate compensation agreements, which were built and constructed by the board's compensation committee. However, organizations are ditching contracts with confusing language and complex bonuses, incentives and benefits.

"Hospitals are getting away from 'smorgasbord' compensation," says Tom Flannery, PhD, partner with consulting firm Mercer. "The reason is the design of those types of compensation programs can be very complex, making administration cumbersome."

Dr. Flannery explains there is another reason why compensation arrangements no longer look like labyrinths: Hospitals have to explain their rationale for compensating executives, and having straightforward contracts with easy-to-discern goals makes their community or investor relations job much simpler.

"It's easier to explain a simpler program than a complex program," Dr. Flannery says. "Quite often, organizations have to explain their compensation program to one, or even all, of four parties: the IRS, the attorney general, the newspaper or their own employees. The simpler the program, the more efficient and effective the explanation is."

2. Performance, not just market data, will influence pay levels. Similar to last year, hospitals and health systems are no longer relying solely on market-based salary data to construct executive compensation contracts.

Salary and total cash compensation are still largely determined by market percentiles, comparisons to similar-sized institutions and other factors shown in compensation firm studies and surveys, but "pay-for-performance" data are also becoming more inculcated into routine. For example, CEOs may be paid in part for achieving certain patient satisfaction scores or maintaining physician relationships.

"The essential structures of executive compensation have not changed substantially," says Deedra Hartung, senior executive vice president and managing director of Cejka Executive Search. "But healthcare reform is changing the goals and objectives that incentives are tied to as the system moves away from volume-based to value-based payment models. For example, metrics based on the degree of physician alignment would play a greater role."

Dr. Flannery adds that hospitals must also justify how they choose their market data for executive compensation. For example, if a hospital wants to pay the CEO in the highest compensation brackets, the performance must justify decision.

"If you're going to be paid at the 75th percentile, you have to demonstrate 75th percentile performance," Dr. Flannery says. "There is much more pressure on making sure there is a causal relationship between pay and performance."

Consequently, boards are more likely to have clearer expectations in their compensation meetings, and objectives are more likely to be focused on quality of care, safety, patient satisfaction, physician satisfaction, employee satisfaction, reputational image and cost of care efficiency.

3. Compensation for health system CEOs will routinely hit seven figures. According to Mercer's 2012 integrated health networks compensation survey, hospital and health system presidents and CEOs continue to record the highest salaries and cash compensation totals in the industry.

Health system presidents and CEOs continue to make the most of any C-level position. Health systems that want to pay their CEOs in the 75th percentile are looking at a total compensation package around $1.46 million. Health system CEOs in the 25th percentile are making just shy of seven figures at $982,800, according to the survey.

Standalone hospital CEOs are also seeing high pay totals, but their total compensation usually does not exceed the $1 million benchmark. Standalone hospital CEOs at organizations with more than $500 million in annual revenue — some of the highest earners at standalone hospitals — earned roughly $962,600 in the 75th percentile for 2012. Across all-sized organizations in Mercer's survey, standalone hospital presidents and CEOs still made $480,000 in the 25th percentile.

4. Compensation for critical C-suite positions will climb, too. While presidents and CEOs take home the biggest paydays at hospitals and health systems, other executive positions are holding steady with six-figure payouts. CFOs, CIOs and CNOs at high-grossing hospitals and systems normally make between $340,000 and $650,000.

Mercer's analysis examined compensation data for 2012 for three non-CEO hospital executive positions: CFO, CIO and CNO. CFOs at hospitals and health systems with more than $1 billion in total revenue earned anywhere from $310,800 to $649,300 — the highest of the three non-CEO positions studied at the largest of health systems. Even across all organizations, CFOs can expect to record total cash compensation between $171,800 and $335,000.

However, CIOs actually made more than CFOs, on average, across all-sized organizations. Total cash compensation for CIOs ranged from $250,700 in the 25th percentile to $415,400 in the 75th percentile. Base salaries reached as high as $362,400 for CIOs across various-sized hospitals and health systems.

For chief nursing executives, salaries and total cash compensation are among the lowest of non-CEO executive positions. However, depending on the size of the hospital or health system, CNOs could earn up to $340,300. Middle-of-the-road salaries for CNOs hover between $171,700 and $236,600, while total cash compensation for CNOs in the 50th percentile could hit anywhere between $187,500 and $282,800, according to Mercer's survey.

5. Retaining key talent will be an element of many compensation programs. In order to keep highly qualified executives and prevent turnover during a hectic period of reform, many systems are installing retention devices in their compensation plans.

For example, Dr. Flannery says hospitals may award a CEO a bonus of 30 percent of base pay, if all performance criteria are met. However, half of the bonus may be paid immediately, while the other half may be deferred over five years. That could scatter tens of thousands, or hundreds of thousands, of dollars over several years, and if the CEO left during the deferment period, the bonus may be forfeited. This may make someone reconsider before leaving, Dr. Flannery says.

Michael Dunford, executive vice president and managing principal at Cejka Executive Search, agrees. He says some of the most forward-thinking and innovative compensation contracts he has seen involve "attractive, performance-based, deferred packages that are meaningful and tie in retention" in order to receive full value.

6. Perks are becoming a thing of the past. Steven Slutsky, JD, director and executive compensation consultant in PwC's Philadelphia office, says many popular perquisites of the past are quickly on the decline now, even more so than last year. Cars, country club dues, home office equipment, spousal travel and others are fading away due to their negative perception.

Instead, hospitals and health systems are rolling perquisites into total cash compensation, which hospitals can more easily defend.

"[Giving out perquisites] can look horrible: You're giving the CEO an automobile, but not employees? Don't executives make enough to pay for their own car?" Dr. Flannery says. "Organizations do not want the distraction of those arguments. Have compensation that is appropriate, competitive and reflects the performance of the individual executive as well as the collective performance of the executive team."

7. Executives behind CEOs will be in high demand — and compensation will follow. Dr. Flannery explains that as healthcare reform continues to chug along, there are still only a select group of hospital and health system CEOs that have helped initiate major projects, like accountable care organizations. "If you think about the organizations that have already done that, the CEO is probably not going to leave in the middle of the project," he says.

However, executives who are second- or third-in-command, such as the COO or CFO, who have successfully helped with ACOs and other healthcare reform efforts have created a new market for themselves.

"Those people now become in high demand because they have demonstrated the skills to do all the complex work that is necessary, and they have the hands-on experience," Dr. Flannery says. "There's likely to be a bump in their compensation, particularly for those who have demonstrated success."

8. Physician executives will continue to attract unique compensation packages. Because hospital executives will increasingly be paid on value and performance rather than market rates and profitability alone, there is one subset of executives that may have an advantage in terms of experience: physician executives.

Physicians who have turned to the C-suite may already be very familiar with value-based purchasing, as well as inner workings of an organization's clinical setting, and this places a premium dollar on their availability.

"Physician executives with experience and working knowledge of various payor contracting systems have been in high demand and are well-positioned for senior leadership roles," says Paul Esselman, executive vice president and managing principal at Cejka Executive Search. "In this environment, those physician executives with the 'triple-threat' skills and experience in clinical practice, system engagement and managed care administration are in a unique position to tie the clinical outcomes to reimbursement, thereby maximizing their value and compensation opportunity."